Guest article by Janina Garbas, finalist of the 2023 SERVSIG Best Dissertation Award.
“The concept of product is undergoing a rapid transformation in the digital age.” (Kannan & Li, 2017, p. 31).
In recent years, technological advancements have fundamentally transformed many aspects of human lives, including the way products are designed, manufactured, and delivered. While the manufacturing industry has long been associated with tangible goods, technology has caused a shift toward the incorporation of services into its core product offerings. This trend, known as service infusion, has been considered a key research priority over the years (Ostrom et al. 2010; Ostrom et al. 2015) and has become increasingly relevant in today’s market.
Driven by the evolution of the Internet-of-Things, physical products are not static anymore but evolve into so-called dynamic service platforms that allow for post-purchase customization (Ng & Wakenshaw, 2017), hence creating the potential for ongoing revenues that go beyond the mere purchase of the physical product. Car manufacturers such as Tesla, Audi, and BMW increasingly transform their cars into such platforms: they sell vehicles with built-in add-on (hardware and software) features that are deliberately restricted in their function. For an additional fee, consumers can reconfigure their cars by activating those features. For instance, Tesla’s 60-kWh vehicles were originally equipped with a 75-kWh battery that was restricted via software. Customers who owned the 60-kWh vehicle had the option to pay an extra fee of $2,000 to unlock the additional 15-kWh capacity. This novel marketplace phenomenon is referred to as internal product upgrades (or features on demand) and can be defined as fee-based activation of originally built-in, but deliberately restricted, optional features.
Anticipated as a multi-billion-dollar business, internal product upgrades are poised for growth. Carmakers, for instance, projected a potential revenue boost of 155€ (= $184) billion by 2022 by enabling customers to improve their vehicle’s features throughout its lifecycle. By integrating standardized features across all vehicles, manufacturers can also lower production costs through economies of scale. As a result, firms expect internal product upgrades to generate significant profits. Furthermore, internal product upgrades are believed to offer advantages to consumers as they allow them to conveniently adjust their product according to their changing needs, hence providing greater flexibility.
So, internal product upgrades really seem like a win-win business model. Nevertheless, despite this optimistic outlook, they may entail certain risks that marketers must comprehend to enable the transition to a profitable service-centered mindset for physical products. The research entitled “You want to sell this to me twice!? How perceptions of betrayal may undermine internal product upgrades” (Garbas et al. 2023), which is part of my dissertation, addresses potential downsides of internal product upgrades. We find that having to pay an additional fee to gain access to a feature that is already built into their product (i.e., their legal and/or perceived property), is considered a norm violation by consumers as they feel that the feature is part of their ownership already. In turn, consumers have a lower willingness to pay for the additional feature and show decreased loyalty intentions toward the firm. Investigating strategies that revolve around different elements of the managerial marketing mix, we demonstrate that the negative effects are attenuated when (1) the company (vs. consumer) executes the upgrading, and (2) consumers upgrade an intangible (vs. tangible) feature. Finally, consumers react less negatively when (3) the base product is less relevant to their self-identity. These insights reveal that—despite its various advantages—mixing products and services is not trivial and has to be implemented cautiously.
In conclusion, service infusion enabled by technological advancements is transforming physical products. It creates new opportunities for companies to generate additional revenues beyond the purchase of the original product and has the potential to offer additional value to consumers. Acquiring a better understanding of circumstances under which internal product upgrades and other service-induced business models in physical products backfire and how firms can promote their product-service offerings is crucial for a successful transition from product-centered to service-centered mindsets and requires future research (for a research agenda on internal product upgrades see Garbas et al. 2023). As companies continue to explore these trends, we can expect to see even more innovation and disruption across a range of industries which holds great potential for further research.
Garbas, J., Schubach, S., Mende, M., Scott, M. L., & Schumann, J. H. (2023). You want to sell this to me twice!? How perceptions of betrayal may undermine internal product upgrades. Journal of the Academy of Marketing Science, 51(2), 286-309.
Kannan, P. K. (2017). Digital marketing: A framework, review and research agenda. International Journal of Research in Marketing, 34(1), 22-45.
Ng, I. C., & Wakenshaw, S. Y. (2017). The Internet-of-Things: Review and research directions. International Journal of Research in Marketing, 34(1), 3-21.
Ostrom, A. L., Bitner, M. J., Brown, S. W., Burkhard, K. A., Goul, M., Smith-Daniels, V., Demirkan, H., & Rabinovich, E. (2010). Moving forward and making a difference: research priorities for the science of service. Journal of Service Research, 13(1), 4-36.
Ostrom, A. L., Parasuraman, A., Bowen, D. E., Patrício, L., & Voss, C. A. (2015). Service research priorities in a rapidly changing context. Journal of Service Research, 18(2), 127-159.
Postdoctoral Researcher and Chair of Marketing (TIME Research Area)
School of Business and Economics, RWTH Aachen University